Personal Finance Blog by Debit versus Credit

Last Day to Win $25 Cash and a Personal Finance Book

October 30, 2008 | Filed in: Miscellaneous | No comment

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Happy Halloween!  If you haven’t already heard I’m sponsoring a contest where I’m giving away cash and three copies of the book, Scratch Beginnings. It’s easy to enter.  All you have to do is go to the contest link, do any (or all) of the following and leave a comment at the contest post.

• 1 Entry - Subscribe to my feed via e-mail
• 1 Entry - Follow me on Twitter
• 2 Entries - Write a short blog post about Debit versus Credit and why you think your readers and friends ought to check it out.
• 1 Entry - Link to Debit versus Credit

Good luck everyone!  Don’t forget to leave your comment so you’ll be officially entered in the contest! I’ll announce the winners sometime next week!

Tags: contests

Fed Cuts Rates to 1%

October 30, 2008 | Filed in: Economy | 2 comments

Many of you may have heard by now that the Federal Reserve cut their key fed-funds rate to 1%, bringing it in line with the lowest level that it’s ever been at. Interestingly enough the last time that the rate was at 1% was within this decade - from June of 2003 until June of 2004. Even more interesting is that many people and economists have laid partial blame for the housing crisis on this low rate, essentially saying that the fed made money too cheap and caused people to be greedy and take unnecessary risks. If all of this is the case, then what of this time? Will having such a low rate now cause unexpected hardships in the near future? Besides that what does it mean for me and you now that the fed funds rate is at 1%?

Let’s look at the facts…

First of all a description of what the fed funds rate is, from CNN Money.

The fed funds rate is used to set rates for a wide variety of consumer loans, including home equity lines and credit cards, as well as for many business loans.

You’ve likely heard of the prime rate.  The prime rate changes in line with the fed funds rate.  It is almost always 3% higher than the fed funds rate, which would put the prime rate at 4% sometime in the near future.  Almost all of the banking products that you use are based on the prime rate.  Both deposit accounts and loans change along with a change in the fed funds rate (and therefore the prime rate).  You can expect savings rates of all flavors (cd’s, money markets, savings) to drop and on the flipside you’ll likely see some loan rates to drop as well.

Keeping all of that in mind let’s take a look at what the lower fed funds rate is likely to do for the economy.  There are two options.  It will do nothing, as in not help at all, or it will hurt the economy.  There is no other option.  It most definitely will not help matters at all.  Why?

The problem with the current credit crisis is not that loans are expensive.  They’re actually pretty inexpensive.  At the credit union I work at an auto loan starts at about 5.5% and if you look at bankrate.com the national average for an auto loan is about 6.5%.  No, loans are not expensive, banks are just unwilling to lend, especially to each other.  They are afraid that if they lend out too much of their cash that they could end up in an illiquid situation and go bankrupt just like Lehman Brothers, WaMu or any of the other failures we’ve had as a result of this crisis.

One economist said it best, as quoted again from CNN Money.

“The latest Fed move is not going to hasten the economic recovery by a single day or accelerate the cleansing of bank balance sheets,” said Bernard Baumohl, executive director of The Economic Outlook Group. “What is needed more than anything else at this stage is simply patience.”

Be Patient Mr. Bernanke, Be Patient World.

This thing is not going to fix overnight.  There is no easy fix.  The fed funds rate at 1% won’t do a single thing to fix it.  So why lower it?  It’s probably purely psychological, and at this point it shouldn’t do much harm but I’m afraid the problem is that they won’t raise rates until the crisis cleans out completely, at which point it may be too late.  By then there may have begun another lending bubble.  Let’s hope Bernanke is smart enough not to let it come to that.

In the meantime let’s all practice a little patience, shall we?  It is after all a virtue, and shouldn’t we all strive to be virtuous?  If we were you can bet we wouldn’t be in the mess we’re in right now.

Tags: Credit Crisis, Federal Funds Rate, Federal Reserve, Prime Rate

Investing For Beginners: Analyzing Financial Statements

October 29, 2008 | Filed in: Investing | 1 comment

Today I’ll be continuing the multi-part series Investing for Beginners.  Don’t forget to read the first part, Stock Market Basics if you haven’t already.  If you want to keep updated with new additions to the Investing for Beginners series then don’t forget to subscribe to the Debit versus Credit RSS feed.  Today I’ll be covering a little bit about Accounting, specifically how to analyze financial statements.

Now hold on!  Before you run away let me explain.

I realize that most of you are probably not especially fond of accounting, especially after having to endure the hell that is debits and credits. If you do enjoy accounting you are a member of a small minority and I congratulate you. As for the rest of us (myself included) accounting is much too tedious and sometimes even a little bit confusing. That’s not what we’re here for today, though. Today I will be teaching accounting, this much is true. I will only be teaching what is necessary for the dissection of financial statements, which can then be applied to researching a company that you might be interested in investing in. I promise it will be easy but more importantly it will be useful and FUN!

The only accounting that you should ever have to do when it comes to researching investments is as simple as reading existing financial statements.  I am going to provide examples of an income statement today and on the next update I’ll cover the balance sheet and cash flow statements.  I’ll point out what’s important and how you can use these statements to analyze how well a company is doing financially.

The Income Statement

With the Income Statement we want to pay attention to several numbers, with Gross Profit and Net Income being the most important.  This is an annual report which lists the Net Income for the years ended Sep 24 of 2005, Sep 30 of 2006 and Sep 29 of 2007.  This means that the income and other figures listed are from the fiscal year beginning in October and ending in September of the following year.

What do the numbers mean?  And what do we do with them?  There are some relatively obvious ways to dissect this Income Statement.  For example Apple’s net income for the year ended September 2007 was $3,496,000,000 ($3.5 billion) dollars.  If you compare this to the previous year ($1.9 billion dollars) then it seems that Apple is doing something right.  But we’re doing something wrong.  Comparing dollars to dollars isn’t usually the best way to read financial statements, as it’s akin to comparing apples and oranges - especially when trying to compare Apple’s net income against say Dell’s or Microsoft’s.  So how do we do it?

Continue Reading...

Tags: Accounting, Apple, Investing, Investing for Beginners

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